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This is the mother of all bombshells in Europe and no one is talking about it. Germany basically announced that it will allow German banks to DUMP euro-zone government bonds off their balance sheets. It also announced it will provide up to 400 billion euros in backstops and 80 billion euros for bank recapitalization.

Last week we had the Fed's hawks line up one after another telling us how no more QE would ever happen. We ignored them because they are simply the bad cops to the Fed's good cop doves. Sure enough, here comes Bernanke's right hand man, or in this case woman, hinting that one can forget everything the hawkish stance, and that ZIRP may last not until 2014 but 2015! Which, by the way, is to be expected: since ZIRP can never expire, it will always be rolled to T+3 years, as the short end will never be allowed to rise, until the Fed has enough FRNs in circulation to absorb the surge in rates without crushing the principal, as explained yesterday.

What makes this time different? Several items:

1. The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
2. The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).
3. The Fed’s resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a Crisis in of itself.

Back in June 2011, Zero Hedge first pointed out something very troubling: the labor share of national income had dropped to an all time low, just shy of 58%. This is quite an important number as none other than the Fed noted few years previously that "The allocation of national income between workers and the owners of capital is considered one of the more remarkably stable relationships in the  U.S. economy. As a general rule of thumb, economists often cite labor’s share of income to be about two-thirds of national income—although the exact figure is sensitive to the specific data used to calculate the ratio. Over time, this ratio has shown no clear tendency to rise or fall." Yet like pretty much every other relationship in the new normal, this rule of thumb got yanked out of the socket, and the 66% rapidly became 58%. This troubling shift away from the mean prompted David Rosenberg to say that "extremes like this, unfortunately, never seem to lead us to a very stable place." Which is why we are happy to note that as of last quarter, the labor share of income has finally seen an uptick, and while certainly not back at its old normal, has finally started to tick up, which leads us to ask: have we passed the moment of peak Marxism of this particular period in US history?

Federal debt has expanded by $9.5 trillion - from $5.7 trillion in 2000 to $15.2 trillion at the end of last year and, as Neal Soss of Credit Suisse notes, is still growing over $1 trillion a year (or $5 billion per day). The state of fiscal sustainability, as explained in this compendium of slides, is perilous, but as Soss notes - interest expense did not go up because interest rates fell faster than debt went up. Looking ahead, he notes that political choice theory suggests that taxes can go up, but not a lot (even as the change-maker-in-chief presents his case) and at the same time an unprecedented aging (demographic) shock limits the ability to control expenditures. None of this is news to readers but the financial implication is critical: interest rates must be kept as low as possible to avoid explosive debt dynamics. As Soss concludes therefore, and something we have been clear about for a long time, the era of independent central banks is closing as those institutions revert to their foundational role as fiscal agents of the state.

Butler on Blythe

I know, I know: the stock market will never go down because Ben Bernanke and the other central bankers won't let it. It's funny how the "Bernanke/European Central Bank Put" is ranked alongside gravity as a rule of Nature until markets roll over; then talk shifts from purring adulation of central bankers' godlike powers to panicky calls for another flood of liquidity/free money to "save" the market from the harsh reality of global recession. The crash test dummies know better: they've been called up for a humongous crash. The basic mechanism that is being overlooked is Liquidity Resistance. This is akin to insulin resistance, where insulin becomes less effective at lowering blood sugars. The amount of insulin required to maintain normal blood sugar levels increases as resistance rises until even massive doses of insulin no longer have the desired effect and the system crashes.

The following chart from Bank of America captures the past three years of American "recovery" quite starkly: the US economy, as measured by the ISM  has so far not double but triple dipped, and the result would have been far more pronounced had the Fed not stepped in after each of the prior two local maxima and injected trillions into the economy. Following peaks in mid 2010 and early 2011, we are "there" again - how long until the Fed has to jump in? And would it have already done so if it wasn't an election year? Which brings us to our question: third time is the charm? Or head and shoulders?

Chesapeake Energy took the road less traveled by entering 2012 "naked" with none of its gas volumes hedged.

Now that the world is covered in at least $707 trillion in assorted unregulated Over the Counter derivatives (as of June 30, the most recent number is easily tens of trillions greater) and with at least one JPMorgan prop|non-prop trader exposed to having a ~$100 billion notional position in some IG-related index trade, pundits, always eager to score political brownie points, are starting to ruminate over ways to put the half alive/half dead cat back into the box. Unfortunately they are about 20 years too late: with the world literally covered in various levered bets all of which demand hundreds of billions in variation margin on a daily basis, the second the one bank at the nexus of the derivative bubble (ahem JPMorgan) starts keeling over, it will once again be "the end of the world as we know it" unless said bank is immediately bailed out. Again.

Facebook has not even collected the cash from going public and it is already precommitting funds to expand growth (what's wrong with its organic growth? Not good enough?) by purchasing tangential services, such as everyone's favorite photo filtering application Instagram for the ridiculous price of $1 billion (a company which completed its Series A round 14 months ago for a $20 million post-money valuation). In other words, FB hasn't even flash dashed (or crashed - thank you BATS) yet, and it is already facing Traffic Acquisition Costs, because with 30 million users, assuming none of them use Facebook, each user just cost Facebook $33.333 (and realistically much more since virtually everyone who uses Instagram uses Facebook). Shutterfly stock not happy as one more greater fool drops out of the race. That said, we read to encounter the inescapable labyrinth that shutting down one's Instagram account is set to become in a few short days.

No soft landing for Japan. 

The UNFOLDING destruction of the developed world’s economies and financial/currency systems continues apace.  Public servants are trying to defy Mother Nature with the stroke of a pen; she will not yield to this.  Radical Marxist POLITICAL solutions to practical problems are at the end of their collective ropes (double entendre intended).  You CANNOT store wealth in paper, PERIOD.  Those who do will get what they deserve: NOTHING.  It has been and will be printed endlessly from this point forward as Socialist government policies have destroyed wealth creation and substituted Ponzi asset-backed economies in their place.  Now those economic models have reached their COLLECTIVE endpoints.  

Back in 2006, contrary to conventional wisdom, many financial professionals were well aware of the subprime bubble, and that the trajectory of home prices was unsustainable. However, because there was no way to know just when it would pop, few if any dared to bet against the herd (those who did, and did so early despite all odds, made greater than 100-1 returns). Fast forward to today, when the most comparable to subprime, cheap credit-induced bubble, is that of student loans (for extended literature on why the non-dischargeable student loan bubble will "create a generation of wage slavery" read this and much of the easily accessible literature on the topic elsewhere) which have now surpassed $1 trillion in notional. Yet oddly enough, just like in the case of the subprime bubble, so in the ongoing expansion of the credit bubble manifested in this case by student loans, we have an early warning that the party is almost over, coming from the most unexpected of sources: JPMorgan.

The regulators have "fixed" a big problem. Actually they just created a much larger one.